The UK's OSB Group got bank Tier 2 issuance back underway on Thursday with a £250m 10.25-year non-call 5.25 transaction priced with a yield of 10%, a deal interpreted by some bankers as confirmation that – after a tough period for bank capital bonds – the Tier 2 market is now open for all.
The deal was the first capital issuance from a European bank since the banking sector was slammed by a dramatic sell-off last month. Bank capital bonds, especially Additional Tier 1s, widened severely as many investors fled the sector after Credit Suisse's AT1s were written down as part of the bank's rescue.
The market has since recovered, but European banks – many of which are now in blackout – had stayed on the sidelines, only watching from afar while insurance companies AXA and Generali sold insurance Tier 2s earlier this month and Japan's SMFG on Wednesday sold the first AT1 since the sell-off in its domestic market.
OSB Group, a specialist UK lender that had only one bond outstanding prior to Thursday's deal, was a relatively unusual first mover.
A banker at one of OSB's leads said they had decided not to wait for a larger name to reopen the market in case currently conducive market conditions deteriorated once again.
"There are a lot of banks in blackout, so if you wait for someone else, you could be waiting for some time," he said.
"The direction of travel has been positive for the last two weeks, so you're probably better off taking the market in front of you."
He said the issuer and its leads had taken confidence from the strong secondary market performance in sterling Tier 2s in the last couple of weeks, partly due to the supply drought.
The market's journey was encapsulated in the performance of the last sterling Tier 2 issuance, a £750m 6.625% June 2033 non-call 2028 from Lloyds priced at 310bp over Gilts on February 23.
The deal initially performed strongly in the secondary market but widened as fears over the health of the banking sector mounted. The deal's spread peaked at 414bp on March 20, the day after Credit Suisse's rescue, as investors reacted to the AT1 write-down. It has gradually retraced that widening in the weeks since, however, trading back inside reoffer early this month, and was quoted at 288bp on Thursday – tighter even than before the sell-off.
While the signals were positive, it remained to be seen whether that would translate to a positive reception in the primary market.
Bankers away from the deal said that the idiosyncratic nature of the credit and the deal's high yield and relatively small size meant it had only limited relevance as a bellwether of the broader Tier 2 market. But they said it would nevertheless serve as an interesting test of the depth of demand for infrequent issuers.
After holding two days of investor calls, leads Goldman Sachs, Lloyds and NatWest Markets marketed the deal on Thursday morning with initial price thoughts of 10%–10.25%.
The leads announced after just under two hours that the book had passed £425m. Another hour later, they fixed the yield at 10% and the size at £250m on the back of around £450m of demand.
Although OSB was unable to tighten beyond the tight end of IPTs, bankers away from the deal said it was a positive outcome.
"The message it's sending is that the market is open for everyone down to Tier 2," said a banker away from the leads.
"It shows there is appetite and a market for non-national champion names or even high-yield-rated trades, which is a nice upgrade of the status of the market compared to where we were a couple of weeks ago."
AT1 'a different question'
The eye-catching double-digit yield was the highest of any sterling-denominated FIG transaction this year.
Bankers said the best reference points for the new issue were Tier 2s from Close Brothers, Virgin Money UK and Investec, which were trading at yields from 7.5% to 8.5%.
The deal also offered a significant pick-up versus the biggest UK banks. Lloyds' 6.625% June 2033 non-call 2028s were trading at a yield of 6.62%, for comparison.
OSB's £150m 6% perpetual non-call October 2026 Additional Tier 1 was issued in September 2021 and quoted at a yield of 13.6% on Thursday. However, due to the deal's small size and relatively low liquidity, as well as the recent volatility in the AT1 market, most bankers said they were discounting it as a pricing comparable.
Looking ahead, bankers are confident that further sterling or euro Tier 2 supply – particularly from larger issuers – would be well received, although blackout periods limit the numbers of potential issuers. They are much less certain on the prospects for AT1 supply, although some argued that a national champion would be able to reopen the market.
"[OSB Group] is a fairly specific example, but if you consider the interest we're seeing in Tier 2 on the secondary side, I wouldn't have any issues with someone wanting to do Tier 2, in terms of a national champion or well-established name," said a third banker.
"AT1 is a different question. There's a lot of price discovery to do there."